Question

A 10 percent increase in the price of root beer causes a 5 percent increase in the quantity demanded of orange soda. This means that:​ Select one:
a. ​the cross-price elasticity of demand is equal to 2.
b. ​root beer and orange soda are complements.
c. ​root beer and orange soda are substitutes.
d. ​the cross-price elasticity of demand is equal to −2.
e. ​the cross-price elasticity of demand is 1.

Answer 1

Answer:

The correct answer is option c.

Explanation:

A 10 percent increase in the price of root beer causes a 5 percent increase in the quantity demanded of orange soda. This means that root beer and soda are substitutes.

When the price of a product increases. The consumer will prefer a cheaper substitute. As a result, the demand for its substitute good will increase.

Here, an increase in the price of root beer is causing the demand for orange soda to increase.

The cross price elasticity of demand

= $\frac{\% \Delta Q }{\%\ \Delta P}$

= $\frac{5}{10}$

= 0.5